The Trump Lawsuit: A Teachable Moment for Nonprofits

The Donald J. Trump Foundation has been making headlines recently, following New York Attorney General (AG) Barbara Underwood’s June 14th announcement that her agency is suing the Foundation—including its officers, directors, and Donald Trump himself—citing “a pattern of persistent illegal conduct over more than a decade, including extensive unlawful political coordination with the Trump presidential campaign, repeated and willful self-dealing transactions to benefit Mr. Trump’s personal and business interests, and violations of basic legal obligations for non-profit foundations.” The case continues to evolve—on June 26th, a New York state judge instructed Trump’s lawyers and the New York AG to reach a settlement regarding the details of the Foundation’s dissolution by August 15th, according to Bloomberg News. An attorney for the Trump family said the Foundation announced it would dissolve back in 2016, but still needs to distribute around $1 million in funds. The judge has scheduled a hearing on October 11 for the remaining claims against Trump and the Foundation.

While the Trump case is certainly high-profile and exceptionally sensational, the State of New York regularly files lawsuits against foundations accused of similar actions, as Ruth Cambridge of Nonprofit Quarterly recently pointed out. The Trump Foundation case highlights just how important it is for all nonprofits to fully understand what 501(c)(3)s can and cannot do in an election year.

The Importance of Nonprofit Governance

The Trump Foundation is a New York not-for-profit corporation that is tax-exempt under federal law as a 501(c)(3) private foundation. While it must follow New York State nonprofit laws, it is also bound by federal laws, including the Internal Revenue Code (the IRC), which prohibits all 501(c)(3)s from supporting or opposing candidates for public office, and the Federal Election Campaign Act (FECA), which prohibits all corporations (including private foundations) from making contributions (including coordinating activities or communications) with candidates for public office.

After an extensive two-year investigation, the NY AG explosively claims the Foundation was little more than “a checkbook for payments to not-for-profits from Mr. Trump or the Trump Organization,” the collective name for several hundred business entities that Trump controls. The NY AG alleges that the Foundation, which does not have any employees, exists in name only and delegated its operations and finances to Trump Organization executives. Donald Trump and three of his children—Donald Trump Jr., Ivanka Trump, and Eric Trump—all served on the Foundation’s Board. For at least 19 years, the Board reportedly did not meet or set policy or criteria for grant approval, and played no role in actually approving grants the Foundation made. In fact, reporting by the Washington Post alleges that one Board member, Trump Organization Vice President and CFO Allen Weisselberg, did not even know he had been on the Board for more than a decade. The lack of Board oversight opened the door for Trump to run the Foundation, the complaint alleges, according to his whim, timing Foundation disbursements to coincide with his Presidential campaign and disbursing money to charities to settle his personal legal bills.

The Internal Revenue Code imposes excise taxes on private foundations for, among other activities, self-dealing and attempting to influence the outcome of elections. Self-dealing refers to transactions between a private foundation and a “disqualified person”—people who are actively involved with the foundation, such as substantial contributors, foundation managers, and members of their families. As a trustee, Trump is a “disqualified person” for these purposes.

Even when the Board members allegedly knew of the role the Presidential campaign played in directing Foundation disbursements, they did not meet to discuss the Foundation’s role, nor did they approve any of those disbursements. The Board also allegedly did not review or approve any disbursements the Foundation made to charities to settle legal claims made against Mr. Trump’s for-profit businesses, such as those against Mar-a-Lago and Trump National Golf Club. The only Board member who gave approval was Mr. Trump himself.

Board oversight is not simply important as a formality; it can ensure that impermissible self-dealing and partisan political activity does not occur. Even allegations of these activities can undermine trust and hurt your nonprofit’s ability to further its charitable mission, in addition to inviting potential penalties and negative media scrutiny.

Prohibited Political Activities

Bolder Advocacy was particularly interested in the allegation that the Foundation engaged in unlawful political activity. The New York AG contends that, at the behest of Trump’s Presidential campaign, the Foundation—a 501(c)(3)—organized a nationally-televised fundraiser for veterans in January of 2016. The event was held in lieu of the presidential primary debate taking place that same day (which Trump very publicly boycotted). The Foundation then reportedly ceded control of over $2.8 million in tax-exempt contributions from that fundraiser to the Trump presidential campaign team, who then directed and controlled the timing and amount of grants to Iowa-based organizations for the purposes of swaying voters in the days leading up to the Iowa caucuses.

The New York AG’s investigation found numerous instances of communications between the Campaign and the Trump Organization’s accounting team, wherein the Campaign directed the distribution of funds, and found instances of the Foundation’s fundraiser using Campaign materials and slogans (including the enlarged versions of ceremonial grant checks that had both the Foundation’s name and Campaign slogans). Furthermore, the New York AG’s investigation points to occasions on which Trump publicly drew a connection between the fundraiser and his presidential campaign, citing his polling numbers.

These allegations are significant for several reasons. First, federal tax law prohibits all 501(c)(3)s, including private foundations, from participating in “any campaign on behalf of […] any candidate for public office.” This prohibition is absolute, and both public charities and private foundations that run afoul of this rule can be subject to excise taxes and revocation of their tax-exemption. What is considered impermissible “campaign intervention” depends on the facts and circumstances of each case. But the IRS has made clear 501(c)(3)s may not make campaign contributions, whether monetary or in-kind, to a candidate for public office. According to the New York AG, its investigation revealed “clear coordination between the Trump Campaign and the Foundation, which appears to amount to impermissible political participation or intervention by the Foundation.”

Aside from the IRS prohibition against 501(c)(3) political activity, federal election law prohibits corporations, including nonprofits, from making contributions to candidates for federal office. Contributions include money and “in-kind” support wherein something of value is provided to a candidate without receiving fair market value in return. In-kind contributions include activities coordinated with candidates, distributing or republishing campaign materials such as slogans, or sharing non-public information. The New York AG contends that the Foundation made an in-kind contribution to the Trump presidential campaign by spending $2.8 million of the Foundation’s money to help Trump appeal to voters in Iowa.

Finally, federal election law also prohibits candidates from asking or instructing another person to provide the candidate’s campaign with something of value that is not subject to contribution limits. Under this so-called “soft-money” ban, a candidate may not, for example, direct an entity that he founded, controls, and finances to help his campaign in ways that cannot be captured through campaign finance reporting. Yet that is exactly what Trump is alleged to have done: tasking the private foundation he established, controls (as board president), and finances—and which bears his name—with making charitable contributions in furtherance of his presidential campaign.

Potential Legal Consequences

The State of New York’s lawsuit against the Trump Foundation is a civil case, not a criminal prosecution. Nevertheless, the penalties the New York AG is seeking are severe:

Dissolution of the Foundation and termination of the Foundation’s corporate existence in the State of New York;

Barring Donald Trump from serving as an officer, director, or trustee of any nonprofit or charitable organization in the State of New York for ten years, and barring Ivanka Trump, Donald Trump Jr., Eric Trump, and other Foundation figures from the same for a period of one year; and

Requiring Donald Trump and the Foundation to pay double the improper benefit obtained through all self-dealing since July 1, 2014.

The New York AG also sent referral letters to the Internal Revenue Service (IRS), the Federal Election Commission (FEC), and the U.S. Department of Justice’s (DOJ) Department’s Public Integrity Section, alleging that the Trump Foundation may have violated federal tax and election laws. The IRS, FEC, and DOJ could choose to launch their own investigations. The IRS could impose upwards of $560,000 in excise taxes and retroactively revoke the Foundation’s federal tax exemption, meaning the organization would owe years of corporate taxes and could be forced to forfeit its assets. Brett Kappel, a partner in the political law practice of Washington, D.C.-based law firm Akerman LLP, believes “The evidence collected by the attorney general is so compelling that she was able to make a case that the Trump Foundation knowingly and willfully violated the source prohibitions and dollar limits of the Federal Election Campaign Act,” according to the New York Times. The FEC could pursue a civil enforcement action against the Foundation and Trump Campaign, though the Commission is unlikely to do so because of partisan gridlock.

As the New York Times recently reported, the U.S. Department of Justice, meanwhile, has jurisdiction to bring criminal charges for willful or knowing violations of federal tax and election law. Two cases illustrate how seriously DOJ has taken similar cases in the recent past:

In 2007, the Justice Department indicted then-Pennsylvania state senator Vincent Fumo for misappropriating millions of dollars from the state and two nonprofits; Fumo was convicted and served four years in prison and was on probation until 2017.

In 2011, a federal grand jury in Phoenix indicted John Junker, the former Chief Operating Officer of the Arizona Sports Foundation, doing business as “Fiesta Bowl,” a 501(c)(3) organization which organizes the eponymous annual college football bowl game, of making over $45,000 in illegal political contributions with the nonprofit’s money and filing false tax returns. Junker pleaded guilty and was sentenced to eight months’ confinement. Five other Bowl employees were convicted in connection with the scandal, but served no jail time.

Lessons for all 501(c)(3)s

The facts in this case, if true, are egregious; in fact they read like a law school exam question in which a student needs to highlight all the different legal violations. While most organizations do not operate with such seemingly blatant disregard for the law, it is a good reminder of the need for all organizations to comply with applicable state and federal rules. Understanding the rules—not just what is impermissible but all the activities we can do—allows us to be more bold as we further our missions.

Bolder Advocacy will be watching this case closely as it addresses critical questions about what is permissible for 501(c)(3) organizations. If you have questions about what you can do, please visit our website, or contact our technical assistance hotline ([email protected]/ 1-866-NP-LOBBY).

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